CAPScall of the Week: Swift Transportation

For years, satirical late night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why I've made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.

For this week's round of "Better Know a Stock," I'm going to take a closer look at Swift Transportation (NYSE: SWFT  ) .

What Swift Transportation does
Swift is a transportation services trucking and intermodal company in North America. The company primarily transports discounted consumer goods, perishable and non-perishable foods, and manufactured goods. As of the end of 2012 Swift operated 15,300 tractors, 52,800 trailers, and had 8,700 intermodal containers.

In Swift's most recent quarter, the company reported record operating revenue of $857 million which was 4% higher than the year-ago period. Although Intermodal proved to be the biggest revenue boost to Swift, it was the much larger truckload segment that added the biggest boost to its bottom line which saw EPS improve by 50% to an adjusted $0.21 from $0.14 in the same period last year. Despite 252 fewer trucks on the road during the quarter, revenue and utilization per truck increased.

Whom it competes against
In addition to competing against other trucking companies, perhaps nothing stands as more of a brick wall than labor costs. The inability for Arkansas Best (NASDAQ: ARCB  ) to strike a collective bargaining agreement between its ABF Freight Systems subsidiary and the teamsters union nearly resulted in the company laying off 15%-20% of its workforce just to keep its costs competitive with its peers. You can literally see how important having competitive labor costs can be by the doubling in Arkansas Best's share price since the collective bargaining deal was announced.

Costs have been another big concern for YRC Worldwide (NASDAQ: YRCW  ) which has been unprofitable on an annual basis since 2006. Rather than go bankrupt, YRC diluted shareholders into oblivion, ultimately saving it from Chapter 11 but destroying nearly all shareholder value. In order to cut down on its own expenses, YRC has considered merging with Arkansas Best.

Also beyond the competitive aspects of trucking, fuel costs are another important component to keep an eye on. In recent quarters fuel costs have actually been stable, yet concerns about disruption in Egypt could threaten to push diesel prices higher during the all-important summer travel season.

The call
After carefully reviewing the prospects for Swift Transportation, I've decided to make a CAPScall of outperform on the company.

There are three factors which really make me believe that Swift could have 50%, or more, upside from its current market value.

First, the trucking sector as a whole looks ripe for a rebound. Oil prices have been pushing higher which threatens to affect fuel costs in a negative way. In spite of this, trucking companies have had few problems raising the cost of transport and passing it along to their customers. Arkansas Best, for a while one of the biggest underperformers in the sector, raised its prices by nearly 7% in 2011 simply to counteract rising fuel prices and higher labor costs at the time. Similarly, Swift has been able to pass along rate increases that have topped the negative impact of higher fuel expenses.

Second, fuel cost control has been crucial, and will remain a key component to Swift's success. Swift is handling its fuel costs this by maximizing the operating efficiency of its tractor and trailer fleet, and by partnering up with natural gas diesel engine manufacturer Cummins (NYSE: CMI  ) . The goal of this partnership is to develop natural gas engines that get comparable mileage to diesel at a cheaper cost, and when combined with increased CNG fueling stations around the U.S. operated by Clean Energy Fuels (NASDAQ: CLNE  ) , create a win-win scenario for all parties involved. To that end, Swift's fuel operating costs should drop, Cummins will have a steady stream of business, Clean Energy Fuels gets a large fueling customer under its belt that will help with building out its fuel station infrastructure, and the world gets fewer emissions from burning diesel.

Finally, intermodal represents a small percentage of Swift's current revenue (about 9%), but a bountiful opportunity for the company. The reason is that new trucking regulations, which caps weekly hours worked to 70 and requires a documented 30-minute break within the first eight hours worked, threaten to modestly reduce shipping productivity unless trucking companies look for new ways to boost their bottom lines. Intermodal seems like a logical step for Swift and its customers to take as there are simply too many jobs to fill and not enough drivers for long-haul, full-time jobs. Intermodal revenue increased 12% in the first quarter and could be a big growth factor.

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